Market movers today
After the upside surprise in Spanish inflation figures yesterday, the focus turns towards the preliminary inflation data from France today. Please note, that the release of German CPI, which was also originally scheduled for today, has been postponed until next week due to technical problems.
We will also get the euro area flash GDP data for Q4 today, we are looking for 0.2% q/q contraction in line with the German figures yesterday.
In the afternoon, US employment cost index will be released for Q4, while Chicago PMI and Conference Board’s consumer confidence indicator will be released for January. We expect the January figures to paint a slightly less negative picture in line with the PMIs released earlier.
Overnight, the Chinese Caixin Manufacturing PMI is also due for release.
The 60 second overview
Inflation is back in focus after the higher than expected Spanish inflation data yesterday. Today, we will get French inflation data while the German inflation data has been postponed due to a technical factor. The response to the higher Spanish inflation data was a sell-off in the European bond market as well as equity markets.
This morning we have seen the sell-off in Asian equity markets as the equity market prepares for tighter monetary policy from both the Federal Reserve and the ECB. Given the Spanish inflation data the risk is that the terminal rate expectations for ECB will be raised from 3.5% to e.g, 4% despite the weak growth data we have seen from both Spain last week and from Germany yesterday.
FI: European yields and interest rates rose yesterday on the back of higher than expected Spanish inflation data. Today, we will get French inflation data, but the German data has been postponed due to technical issues. The higher inflation data confirms the 50bp hike from ECB on Thursday and adds to the expectations for a higher terminal rate than 4%.
FX: High-frequency return correlation shows that repricing of relative monetary policy has been a key driver in many G10 crosses recently, emphasising the importance of this week’s central bank decisions. SEK and NOK are underperforming EUR and USD, where EUR/SEK challenges critical levels around 11.30 and EUR/NOK equally critical levels around 10.83. EUR/USD at lower end of the range around 1.0840.
Credit: Credit spreads were marginally softer yesterday, with iTraxx Main widening 2bp to 80bp and Xover some 10bp wider to 416bp. Meanwhile issuance in the primary market continued as issuers seemed eager to get deals done before this week’s central bank meetings. The deals that came to the market included a four-tranche EUR deal by IBM and also in FIG space there was decent activity with three senior bonds placed as well as one Tier 2.
Nordic macro
The Riksdag Committee on Finance will hold an open hearing on financial stability in the Swedish economy in the light of high inflation and higher interest rates with the Financial Stability Council, including Riksbank Governor Erik Thedéen and Minister for Financial Markets Niklas Wyman. This constitutes Thedéen’s first publicly accessible ‘outing’ as new Riksbank governor, and it is widely anticipated. With more than 7 days left until the Riksbank’s policy meeting (8 Feb), he still has the opportunity to answer questions on monetary policy, so this at least has the potential to be quite interesting from a market perspective.
Today’s Norges Bank announcement on the fiscal FX transactions for February mark a point of heightened uncertainty and volatility – both for NOK FX spot but not least for the FX swap market where ois basis could move considerably upon announcement. On the one hand, last week’s revision to NB’s structural liquidity projections revealed a NOK 30bn larger oil tax payment than expected (drainage of liquidity). This would in isolation suggest a need for NB to increase its daily NOK selling pace by roughly 150M for the year.
On the other hand, natural gas price futures for 2023 are almost 30% lower compared to one month ago which would suggest considerably lower petroleum revenues later in 2023 and hence a smaller NOK selling need (oil futures are marginally higher). Ultimately, it boils down to how proactive the Ministry of Finance is. Will they only take into account “realised” tax payments or will they to an increasing extent proactively incorporate lower energy prices? Today could prove an important bellwether as to the revised reaction function.
An unchanged amount would trigger the lowest market reaction followed by the scenario where the NOK FX sales amount is lifted modestly. By far the biggest market reaction would come in the scenario where NB announced a lower NOK FX sales need as this could trigger both a rise in NOK FX spot and not least a move higher in short-end NOK FRA/Nowa spreads.
